BOSTON SAFE DEPOSIT AND TRUST COMPANY & others, trustees, vs. STATE TAX COMMISSION.

CUTTER, J. This is an appeal by testamentary trustees from the decision of the Appellate Tax Board refusing abatement of income taxes assessed, pursuant to G. L. c. 62, Section 5 (c), as in effect on May 11, 1955, upon an exchange of shares in Pacific Coast Company (Pacific), a New Jersey corporation. Pacific made adjustments [Note 1] of its shares as of May 11, 1955. See summary on pages 252-253. Prior to and after the reclassification, the trustees owned shares, each having an adjusted cost basis for Massachusetts income tax purposes of zero, as follows:

The trustees continued in possession of their old share certificates after the adoption of the readjustment and reclassification plan, "there being no penalty . . . [for] failure to surrender the old . . . certificates." They received, however, their 1955 dividends on time on the basis of the new stock and exercised at the 1956 annual meeting of Pacific the voting rights accorded to them in the same manner as though they had surrendered their old certificates.

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* Each of the three classes of old capital stock had inchoate dividend rights, if earnings of past years should be distributed, amounting to $25.27 for the first preferred stock, $25.25 for the second preferred stock, and $15.17 for the common. These inchoate rights appear to have disappeared in the reclassification.

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Immediately after the vote of May 11, 1955, the new shares were listed for trading on the New York Stock Exchange and the old shares were withdrawn.

By a letter dated April 6, 1956, the trustees were advised by the State tax commission that the exchanges constituted taxable transactions under G. L. c. 62, Section 5 (c), as in force in 1955. Additional taxes were assessed accordingly, the value of the new shares received being determined at the mean between the high and the low for such shares as shown by sales on the New York Stock Exchange on Monday, May 16, 1955. [Note 2] An application for abatement of the additional taxes was denied. The trustees appealed to the Appellate Tax Board which found the facts to be as set forth in an agreed statement. The facts stated above are as set forth in the board's findings, including the agreed statement incorporated therein by reference. The board denied various requests for rulings, and rendered a decision for the State tax commission. The trustees have appealed.

General Laws c. 62, Section 5, as then most recently amended by St. 1954, c. 599, Section 1, was in effect on May 11, 1955. [Note 3] So far as here pertinent, it reads: "Section 5. Income of the following classes received by any inhabitant of the commonwealth during the preceding calendar year shall be taxed as follows: [as appearing in G. L. (Ter. Ed.) c. 62] . . . (c) The excess of the gains over the losses received by the taxpayer from purchases or sales of intangible personal property . . . shall be taxed at the rate of three per

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cent per annum [Note 4] . . . [as appearing in St. 1935, c. 481, Section 1]. . . . If, in any exchange of shares upon the reorganization of one or more corporations . . . the new shares received in exchange for the shares surrendered represent the same interest in the same assets, no gain or loss shall be deemed to accrue from the transaction until a sale or further exchange of such new shares is made . . . [inserted by St. 1922, c. 449, Section 1]." The question for decision is whether under the sentence last quoted (hereinafter referred to as the 1922 amendment) the reclassification of Pacific's shares represented an occasion upon which gain to the trustees could be recognized for the purposes of Section 5 (c) and taxed.

In Tax Commr. v. Putnam, 227 Mass. 522, 524-532, this court sustained, under art. 44 of the Amendments to the Constitution of the Commonwealth, an income tax upon gains from purchases and sales of intangible personal property. As the court said (see p. 530), "no question . . . [was] raised [or decided] . . . as to an attempt to tax gains on the value of property which have not been realized by sale and which would be known in common speech as mere paper profits."

In Osgood v. Tax Commr. 235 Mass. 88, this court considered transactions by which a Maine corporation was reincorporated in Massachusetts. For each share of preferred stock of the Maine corporation, the holders received one and one quarter shares of common stock of the Massachusetts corporation and each holder of a common share of the Maine corporation received two and one half shares of common stock of the Massachusetts corporation. The Massachusetts corporation took over all the assets of the old company and continued the business (at p. 89) "without outward indication of change." This was treated as a taxable sale for purposes of Section 5 (c). It was said (at p. 91). "The stock obtained . . . through exchange was different

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in kind and not merely in degree from that which . . . [the taxpayer] owned before. It was not the same corporation and the stock itself was different in nature. A change of investment had been made both in name and in essence." See also Stone v. Tax Commr. 235 Mass. 93, 95.

Following the broad holdings in the Osgood and Stone cases, the 1922 amendment was added to Section 5 (c) by St. 1922, c. 449, Section 1. The act originated as 1922 Senate Bill No. 265 which on its face showed that its introduction had been inspired by the more liberal reorganization provisions of the Federal Revenue Act of 1921, Section 202 (c); 42 Stat. 227, 229-230, one of the predecessors of Sections 351, 354, and 368 of the Internal Revenue Code of 1954. The bill in changed form, 1922 Senate Bill No. 446, was enacted in its much more restrictive present terms. The original bill, to a considerable extent but by no means completely, would have adopted the then prevailing Federal rule with respect to recognition of gain or loss on exchanges of shares in reorganizations. The 1922 Legislature thus deliberately rejected recognition of gain or loss upon the basis of more lenient Federal tax principles.

The purpose of the 1922 amendment was first explained in Van Heusen v. Commissioner of Corps. & Taxn. 257 Mass. 488, 490, where it was said: "The intent of the Legislature is that where there is really only a change in the form of the representation of the same assets, no income accrues and no gain or loss takes place until a sale or exchange of the newly acquired property fixes it with a value and settles whether there has been loss or gain." The 1922 amendment was first applied to a recapitalization of a single corporate or quasi corporate entity in Commissioner of Corps. & Taxn. v. Tousant, 309 Mass. 84, 88-90, where this court did not disturb a conclusion of the Appellate Tax Board, based upon unreported evidence, that new shares in a trust received upon a reorganization represented the same interest in the same assets as the old shares surrendered. There a taxpayer surrendered one hundred shares of seven per cent cumulative preferred and five hundred common shares in

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return for one hundred shares of five per cent cumulative preferred stock, one hundred seventy-five shares of new common stock, and one hundred twelve and one half stock purchase warrants. This court pointed out that the record failed to show facts which upset the "validity of the ultimate finding of the board, that . . . [the taxpayer's] proportionate ownership was not changed." The Tousant case must be taken to rest (see p. 90) upon the conclusion of the board "that the new shares represented the same interest in the same assets as . . . [did] the old shares," for (at p. 88) the court said, "The exemption from the tax until a gain or loss is actually realized by the sale or exchange of the newly acquired shares does not apply if the new shares give the owner a different interest in the same assets, or an interest in other assets which he did not have as owner of the old shares. In such instances, the receipt of the new shares, if their market value exceeded the cost of those surrendered in exchange, would constitute a taxable gain." The Tousant case (cf. holding in Boston Symphony Orchestra, Inc. v. Assessors of Boston, 294 Mass. 248, 249, 257, as explained in Boxer v. Boston Symphony Orchestra, Inc. 339 Mass. 369, 372-373) is not authority for the position that the 1922 amendment means anything differing from what its language imports. See De Cordova v. Commissioner of Corps. & Taxn. 314 Mass. 371, 372-374, where (at p. 374) weight was given to the board's finding "that the new shares did not represent the same interest in the same assets as did the old shares"; Madden v. State Tax Commn. 333 Mass. 734, 737-740. [Note 5] Cf. State Tax Commn. v. Smith, 331 Mass. 387, 390.

Applying the language of the 1922 amendment to the present facts, the Appellate Tax Board was warranted in concluding that "the position of each shareholder with respect

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to his respective fractional ownership in the beneficial interest of the assets of the corporation was changed by the reorganization." The material differences in the shareholders' rights represented by the stock received from the rights represented by their old stock are amply set out above in the comparative summary of all these rights. The substitution in part of redeemable, convertible, cumulative, nonvoting preferred shares for nonredeemable, nonconvertible, noncumulative, voting preferred shares is in itself a significant variation sufficient, in connection with other circumstances shown, to constitute not only a taxable event but a difference in interest. This is a case where Federal income tax precedents are of little assistance in dealing with problems arising under the different provisions of G. L. c. 62. Cf. Allen v. State Tax Commn. 337 Mass. 502, 506.

The trustees requested, and the board refused, rulings in effect that, where all shareholders of a corporation exchange old shares of several classes representing the total equitable ownership of the corporation for new shares of different classifications representing the total equitable ownership, then the new shares represent the same interest in the same assets. The trustees, prior to the reclassification, held only old second preferred shares and old common shares with appurtenant inchoate rights in dividends. They received new cumulative preferred and new common shares. They held no old first preferred shares. The record discloses that some stockholders prior to the reclassification held only common shares, that at least one held common and first preferred shares, that at least one held only first and second preferred shares, and that at least one other, like the trustees, held common and second preferred shares. Doubtless every effort was made to effect a fair reclassification. Nevertheless, no demonstration has been made (and in view of the variations in prior holdings and the significant alterations in the privileges of the several classes of stock, possibly none could be made) that after the reclassification each stockholder had precisely the same proportionate interest in the same assets as before.

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Within individual classes of old stock, there was no alteration in the position of any shareholder as compared with any other shareholder. In the treatment of classes of old stock as compared with each other the variations, although not great, cannot be said to be insubstantial. Old preferred stockholders of each class lost valuable rights for the benefit of the common shareholders, while gaining other rights at their expense. Conversely, the common stockholders gained valuable rights at the expense of the preferred shareholders, while losing others.

In net effect, we assume that little change was effected in the relative rights of shareholders and classes of shareholders and that any changes were changes in degree and not of major import. If any great alteration of relative rights had been proposed, the readjustment would hardly have been approved by at least eighty-seven per cent of the outstanding shares of each class of stock. We recognize also that certain of the formal changes here appear to be no more substantial than those changes which appeared in the original record in the Tousant case, and, in effect, were regarded there as without significance under the 1922 amendment. Nevertheless, we think that the changed bundle of rights of each class of old shareholders cannot be said, after the reclassification, to represent the same interest in the same assets as the aggregate of rights held by that class before the reclassification.

Two of the requested rulings did not state as the premise of the ruling that each shareholder retained the same proportionate part of the total equitable interest in the corporation which such stockholder previously had. These two requested rulings thus were not consistent with the language of the 1922 amendment. Although requested ruling numbered 2 was stated on this premise, it was inapplicable to the facts shown by the record. The opinion of the board amply shows that to those facts it applied correct principles of law.

There is no merit to the suggestion that this exchange was not a taxable event in connection with which gain or loss could properly be recognized as income under art. 44 of the

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Amendments to the Constitution of the Commonwealth. See Madden v. State Tax Commn. 333 Mass. 734, 738. This was an exchange of intangible personal property and not an attempt to tax unrealized paper profits. See Bryant v. Commissioner of Corps. & Taxn. 291 Mass. 498, 500-501. Cf. Bingham v. Commissioner of Corps. & Taxn. 249 Mass. 79, 81.

The decision of the Appellate Tax Board for the State tax commission is to stand. The State tax commission is to have costs of the appeal to this court.

So ordered.